Signing a director’s guarantee is not a decision to be taken lightly. In doing so, you commit personal responsibility for any debt or obligations if the main debtor (the business) can’t make the repayments or fulfil its obligations. The director of a startup or small business may choose to make a guarantee to obtain funding or enter into contracts with other businesses.
Are directors’ guarantees common?
Directors’ personal guarantees are reasonably common in various types of business transactions, such as loans, contracts or leases. They are usually done to provide extra reassurance to the lender or seller that their debt will be repaid even if the business is unable to afford it.
There are two types of director guarantee. Information about them is available at gov.uk Firstly, there is a secured personal guarantee: this sort of agreement is backed by the director’s personal assets which can be seized in the event of a loan or repayment being defaulted. This may include their own property, vehicles or other assets such as technical equipment.
Of course, this is quite a daunting prospect for any director. No-one wants to be responsible for settling a debt by involving the sale of their own house or assets, so a watertight and realistic business plan is essential to ensure the safe and timely repayment of any loans to avoid things getting to this stage.
Alternatively, an unsecured personal guarantee doesn’t involve the backing of assets, but is based purely on the director pledging to fulfil any debts financially. This may be a little less daunting for the director who is considering signing such a guarantee, but nonetheless, it’s a sizable commitment to make, since they will still be personally liable for any repayments in the event that the business can’t do so.
Professional Advice
In either case, it is absolutely vital to seek out specialist legal advice before signing any sort of director’s guarantee, such as that provided by https://www.parachutelaw.co.uk/director-guarantee.
In doing so, you can ensure that any contracts drawn up are as safe as possible.